Gold hasn’t seen this many investors bail since 2007

Hedge funds cut bets on a rally in gold by the most since 2007 and became the most bearish ever on sugar and coffee as concern that the Federal Reserve will slow U.S. stimulus programs drove prices for raw materials to the biggest loss this year.

Money managers and other large speculators reduced their net-long position in gold futures and options by 40% in the week ended Feb. 19 to 42,318, the biggest drop since July 31, 2007, U.S. Commodity Futures Trading Commission data show. Wagers across 18 U.S. raw materials tumbled to the lowest since December 2011 as investors’ net-short positions for sugar and coffee hit record highs. Bullish corn wagers fell the most since June 2010.

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Global holdings of exchange-traded products backed by gold tumbled 1.6% last week, the most since August 2011, after minutes of a Fed policy meeting showed several officials said the central bank should be ready to vary the pace of their monthly bond purchases. The Standard & Poor’s GSCI Spot Index of 24 commodities sank 2.6%, the most since Dec. 7. The gauge surged 85% in the four years through Dec. 31 as the Fed expanded its balance sheet to more than $3 trillion.

“The expectations and rhetoric out of the Fed about an exit strategy has spooked people, making them think the Fed is going to tighten stimulus,” James Dailey, who manages $215 million at TEAM Financial Asset Management LLC in Harrisburg, Pennsylvania, said in a telephone interview. “There’s a confluence of weak gold owners, and people who don’t have a strong conviction about owning gold.”

Commodities Slide

The GSCI Index has dropped 1.4% in February, heading for the biggest monthly loss since October. The MSCI All-Country World Index of equities was little changed, while the dollar advanced 2.5% against a basket of six trading partners. Treasuries rose 0.2%, a Bank of America Corp. index shows.

Many Fed policymakers “expressed some concerns about potential costs and risks arising from further asset purchases,” according to the minutes of the latest Federal Open Market Committee meeting released Feb. 20. The central bank is purchasing $85 billion a month in debt, putting it on track to expand its record $3.08 trillion balance sheet by $1.02 trillion this year.

Fed Governor Jerome Powell said Feb. 22 the central bank could revise its plan to eventually sell the securities acquired during its large-scale asset purchases, both to avoid causing financial instability and taking losses on its sales. Fed Governor Jeremy Stein said this month some credit markets, including leveraged loans and junk bonds, show signs of potentially excessive risk-taking. In 2007, the central bank held less than $900 billion in assets.

China Imports

China’s demand for commodities will continue to support prices as the country imports more energy, metals and grains, according to Adrian Day, who manages about $170 million of assets as the president of Adrian Day Asset Management in Annapolis, Maryland.

China bought 410,000 metric tons of soybeans from the U.S., the Department of Agriculture said on Feb. 22. The Asian nation has a “structural shortage” of grain because demand continues to rise, Minister of Agriculture Han Changfu said in a statement posted on the central government website on Feb. 21. Imports of copper rose 2.9% in January from December, customs data showed Feb. 8.

In Brazil, a record backlog at the Port of Santos may delay shipments of soybeans, corn, wheat, rice and sugar to China. The country’s ports have 192 ships waiting to load 10.8 million tons of commodities, compared with 90 ships waiting to load 4.1 million tons a year earlier, researcher SA Commodities said Feb. 22.

Agriculture Demand

“I track a lot of shipping into China, and they can’t get enough to meet their demand for agriculture,” said Jeffrey Sica, who helps oversee more than $1 billion of assets as the president and chief investment officer of Sica Wealth Management LLC in Morristown, New Jersey. “There’s this whole sentiment around the funds selling off, but the demand is still very much there.”

Money managers took $828 million from commodity funds in the week ended Feb. 20, said Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Outflows from gold and precious-metals funds totaled $870 million, the seventh straight week of net withdrawals, the longest stretch since first quarter of 2011, he said.

Copper Wagers

Wagers on a rally for copper tumbled 51% to 11,413 contracts, the lowest since investors were betting on a decline in November, the CFTC data show. Bullish silver holdings slumped 34%, the biggest drop since June.

A measure of net-longs for 11 U.S. farm goods plunged 44% to 190,892 contracts, the lowest since March 2009, the CFTC data show.

Investors are holdings a net-short position, or bets on a decline, of 57,073 contracts in sugar, and are net-short by 28,454 contracts for coffee. Both outlooks are the most negative since at least June 2006, when the government data begins.

Last week, stockpiles of coffee at warehouses monitored by ICE Futures U.S. rose to the highest since March 2010. In the 12 months starting Oct. 1, world sugar output may exceed demand for a third consecutive year, according to Macquarie Group Ltd.

Bullish corn positions plunged 48% to 65,303 contracts, the biggest drop since June 29, 2010. Bets on a soybean rally slid 5.4%, the second straight decline. Investors increased their wheat net-short holding to 49,223 contracts, the most bearish since May.

Corn Production

The USDA said last week that corn production will rise 35% to 14.53 billion bushels in the year that starts on Aug. 31, and stockpiles will more than triple to 2.177 billion bushels. Soybean inventories will double as domestic production will jump 13%, the agency said.

“With these big crops, that’s an indication that supply concerns will be lessened,” said Donald Selkin, who helps manage about $3 billion as chief market strategist at National Securities Corp. in New York. “If there’s no weather concerns, corn and soybean prices are going to go down.”

Active Investor was produced by Postmedia's advertising department in collaboration with iShares by BlackRock to promote awareness of this topic for commercial purposes. Postmedia's editorial departments had no involvement in the creation of this content.

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